V, U, W, L — just a handful of the letter-shaped recoveries that investors have put forward as possible paths for the US economy, once the worst of the coronavirus crisis is over. More recently, the idea of a “Nike swoosh” recovery has taken hold, implying a rebound in economic activity that is flatter and slower than the drop.
The most optimistic forecast of the bunch — the V-shaped rebound — was once enthusiastically adopted, as some analysts likened lockdowns to a self-induced coma. But many investors and policymakers have now dismissed that idea, suggesting a much less robust resurgence after what may well be the worst economic downturn since the Great Depression.
In fact, the latest survey of global fund managers from Bank of America, released last week, showed that just 10 per cent of respondents expect the recovery to resemble the letter V.
Mike Wilson, chief US equity strategist at Morgan Stanley, said the majority of investors were too pessimistic. He likened U-shaped recoveries, where there is a long lag before a rebound, to unicorns, arguing that such an outcome “really never” happens. This time around, he cited both the “historic steepness” of the slide in economic activity, paired with the enormous policy support provided by the Federal Reserve, as reasons why he is banking on a “V”.
“The combination of the two is a pretty powerful cocktail,” he said.
Michael Feroli, an economist at JPMorgan, takes a different view. He said the “V” in V-shaped recovery stood for “very unlikely”, noting the hit to the balance sheets of corporate America, the likely pullback in state and local spending, and the potential for permanent job losses. All are factors that might mean the recovery is much slower and more painful than anticipated, he said.
A handful of Fed officials, including chairman Jay Powell, have issued similar warnings, but according to Mr Wilson, their gloom only buttresses his case. “If policymakers are nervous, it means they will continue to provide support.”